Tuesday, 30 May 2017

Today’s very short post looks at the news that Goldman
Sachs, having recently bought $2.8 billion’s worth of bonds issued by the
Venezuelan state-owned oil company Petróleos de Venezuela (PDVSA), is being heavily
criticised for doing so by opposition leaders in the country. For this short
post, the actual details of this sale will be scrutinised because it reveals an
understanding of the philosophy of big financial institutions like Goldman
Sachs, as if that were needed at this point, which is important to consistently
repeat – the acceptance of such a philosophy can never be allowed to become the
‘norm’.

Goldman Sachs
do not owe any responsibilities to the Venezuelan people, unfortunately. Technically,
the leading management at Goldman have acted in their best interests, and the interests of their shareholders, as
every piece of Company Law legislation dictates that they must. However, the
bank have made a ‘quick buck’
off of the Venezuelan people, and it will be fascinating to see the reaction of
the bank if the oppositions pledge to not honour the bonds ever materialises –
but, Goldman will profit from this
transaction. Large financial institutions like Goldman operate on returns, and
must consistently seek to provide returns for those depending on them by any
means necessary – unfortunately, dispersed shareholders can accumulate to
create an incredible effect upon the culture of an institution so that ethical
manoeuvers, considered business practices, or even just a reduced rate of return
are viewed with severe hostility. Investors and Shareholders must take a lot of
the blame for this parasitic culture that is a blight upon modern society,
because as Goldman have recently demonstrated, they will have no concerns with the effect of their
actions as long as their targets are met. Those who force through their targets
should watch the news of the deterioration of Venezuelan society and ask
themselves ‘how much is that extra percentage point on the return on the
Goldman shareholding really worth?’

Monday, 29 May 2017

Today’s short post reacts to the news that the majority of
shareholders pursuing legal action against the former CEO of RBS, Fred Goodwin,
as well as the Bank itself for representing a false picture of their health
before a £12 billion cash call in 2008, have apparently decided to accept a
settlement offer from RBS at 82p per share, 10p less than they had hoped. For
this post, the details of why this is happening are of importance, as is the
fact that the country will presumably miss out on a chance to witness a group
of individuals who partook in the pilfering of society be examined in a court
of Law.

We have only recently discussed this case here
in Financial Regulation Matters, so
there is little need to go into any great detail on the case itself. Essentially,
in 2008 RBS had painted a picture of its health before a £12 billion cash-call
that was simply not true, with those who had met the call losing serious
amounts of money shortly afterwards. A group of 9,000 investors and
shareholders had initiated legal action against the former CEO Fred Goodwin and
a small number of Directors who sat on the Board at the time (the case also
cites the Bank itself), but last week, just
hours before the case was due to be heard in the High Court in London, RBS
offered the claimants £200 million in compensation, representing 82p per share.
As a result of this development, the Judge hearing the case, Judge Robert
Hildyard, had adjourned the case until the 7th of June, stating that
‘we must have certainty
one way or the other. The court must know whether the matter is to proceed or
not’. However, news today suggests that the court will in fact know whether
the matter is to proceed or not, with the RBS Shareholder Action Group advising
investors involved in the case that ‘we
have decided to accept the offer of 82p per share on behalf of our membership’,
with 70% of claimants needing to accept the compensation offer to bring the
case to a premature close. The Action Group suggest that it is in the best
interest of the claimants to settle now, because the case against the
individual directors is ‘mixed’, whilst it is also very likely that the Bank
will appeal the decision and extend the legal process much further. Yet, the
clearest indicator that Goodwin and his associates will not face the court came
with the news that Trevor Hemmings, the businessman funding the claim, will be
accepting the offer and, as such, withdrawing his funding. Ultimately, ‘that
means that there is currently no available funding to fund the legal and other
costs to take the matter to trail’; it seems the system has worked to a
tee.

Yes it is disappointing to hear that Fred Goodwin, the man
at the helm of a bank that continues to drain the resources of the British
Public even to this day, will avoid being seriously
questioned regarding his actions. For the claimants who are not as well represented
as Trevor Hemmings, the reality is that ‘despite
the likely £200 million settlement, however, lawyers, funders and other
advisers to the action group will take between 40 and 45% of the proceeds,
meaning some investors will be left feeling short-changed’; yet, Goodwin is
free to spend his millions. However, let us take a different viewpoint: this is
not a failure of the system, but a victory. The financial elite have, yet
again, been able to manoeuvre themselves so that they are best placed to
pilfer, whilst the system makes it nigh on impossible to prosecute them –
unless there is overwhelming evidence
of fraud i.e. Bernie Madoff, then there is very little chance of conviction.
Rather, the public will bear the costs of these pilfering endeavours, large
investors will be able to claw some of their investment back, and the smaller ‘retail’
investors will be left to feed off crumbs. So, Fred Goodwin did not luckily ‘escape’
being publically examined, simply because this was arguably never an option in
the first place. In fact, this case represents another component of the amnesia
that is slowly taking hold – soon there will be no one left in the public eye
associated with the financial crisis, which will be the foundation for forgetting
it ever happened.

Sunday, 28 May 2017

Today’s post represents somewhat of an update on two posts
that have come before here in Financial
Regulation Matters, concerning the relationship between big
business and the student accommodation sector, and then the continued
increase that followed. Rather than go over these particular issues again,
this post will instead analyse the conclusions emanating from the recent ‘Student Housing Conference’ held
on Wednesday, and then expand this analysis to look at some of the issues that
may result because of these developments, particularly in relation to the
notion of equality and the impact upon studies.

The recent Student Housing Conference, held in London last
Wednesday, saw some of the world’s richest individuals and institutional
investors flock to Covent Garden, so much so that the annual gathering ‘had
grown from 200 people to more than 500’ and ‘potential
buyers were forced to stand during presentations’. In addition to this, the
new trend sees foreign investment flooding the marketplace, with ‘more than 70%
of investment coming from overseas’ because ‘they
have seen how much others have made from student housing’. The increase,
which is represented by a doubling in sales values last year compared to
2013-15 combined, is one thing, but
the development of standards and, crucially, costs for students, is of
importance for our understanding. The newspaper article in The Guardian that
discusses this issue promotes the notion that, based on research by Knight Frank, students are now ‘willing’
to pay more than £160 per week ‘if
the facilities impress them’ – whatever that means. Yet, as is the modus
operandi here in Financial Regulation
Matters, we must question everything; so, who are these students who are willing to pay more than £640 per
month for their accommodation?

The newspaper article discusses the benefits of these accommodation
blocks that charge increased rents, ranging from concierge services – that,
apparently, will have a ‘chat’ with you if you are feeling homesick - to in-house
cinemas that include ‘scarlet velvet love seats’ which, in the words of the
designer, ‘at
least help today’s students to behave badly’. However, both qualitative and
quantitative research is clear on this issue. In terms of the origins of
university students, only around 10% of students hailed
from private-schooled backgrounds, with one academic study suggesting that University
is now aimed at those who rely upon familial wealth – leaving the lower
classes, and even the working-middle class ‘squeezed’.
The author makes the point that the British Governments, of successive
generations, have assumed that families have more wealth than they actually do,
which has led to a model that is making the process of bettering oneself via
education that much harder. Rather than ‘students’ being concerned with a
helpful concierge service, or velvet seats in an in-house cinema, studies
actually show students struggling to pay rent, having to accept
poorer quality accommodation because of the increased costs in the sector,
and working
to help fund their living and course costs (often more than they are
technically allowed to do so by their Universities). The façade of plush
apartments with contemporary amenities covers the reality of an ever-increasing
level of student poverty, which is demonstrated clearly in examples like the
University of East Anglia establishing
a food bank for its students. On this basis, the increase in foreign
investment in the sector is particularly
bad news for a number of reasons.

The positive headlines that this increased investment brings
for our politicians come at a time when the more localised student
accommodation sector, one which is, for the most part, unregulated, is coming
under pressure. In Warwick and the surrounding areas, to provide just one
example, there is a push
to rid communities of anti-social behaviour by students by forcing them
away from residential communities in shared houses (for example) that are owned
by private landlords, into ‘purpose-built’ accommodation. Whilst on the one
hand this sounds perfectly reasonable, the other side of the equation is that
these residential dwellings are affordable to a number of students, whereas
purpose-built accommodation is not. Rather than regulating the residential
student accommodation market more tightly, the government and local councils
are seemingly more than happy to push students into the purpose-built
accommodation that massive investors are flocking to because of the ‘low
risk’; it is indeed ‘low risk’ for investors, because the government will
continue to set the environment so that ‘consumers’ for continuously pushed
towards their products. But, it is not ‘low risk’ for students.

The majority of students in the U.K. do not have familial
wealth to call upon. The majority of students are struggling to focus on their
studies, because they have to work more than they allowed in order pay their
rent, and to feed themselves. As a cohort, the modern-day students are under
more pressure than before, face an appalling
attack on their mental health, are being forced to use food banks for sustenance
and, ultimately, are being deterred at every conceivable angle from bettering
themselves and contributing, positively, to society. Even though this post
absolutely detests the governmental policies of the Conservative Government,
the proposals
by the opposition seem to be as equally frustrating, but for different
reasons – there are doubts as to the practicality of making tuition free when
this current system is so entrenched in its ways; is free tuition even practicable
with the current numbers of students? However, this post finishes with a point
that crops up consistently here in Financial
Regulation Matters – this attachment to extremes is a negative, not a
positive. Why is that we must either have students being forced through the
offal-machine of big business’ foray into student accommodation, leading them
into a mental health/suicide/poverty crisis, or either no tuition fees at all
which would likely lead to the reduction in opportunity? This is not the case,
but is the one that is presented. It is not unimaginable that residential
landlords are held to account for the actions of their student tenants so that
communities do not suffer the blight of an unregulated market, whilst it is
also not unimaginable that some of the money that is raised via increased
tuition fees could be reinvested into purpose-built student accommodation that
is not at the mercy of large institutional investors, making it a realistic
possibility that poorer students would be available to afford such surroundings
without having to starve themselves in the process. In all the stories emanating
from this explosion of interest, one element is consistently missing – for the
student to prosper, they must be allowed to focus
on their studies and give everything they have to their own development; how
likely is it that a student will be focusing upon their studies as they make
their way to a food bank?

Friday, 26 May 2017

In the final article preview this week, this short post will
discuss a topic that has been discussed before here
in Financial Regulation Matters, and that
is the issue of the ever-increasing ‘bubble’ that is motor finance. In
previewing the article ‘The Warning-Light of Automobile Securitisation: Credit
Rating Agencies and Their Role in a post-2016 World’, to be published in the Business Law Review
(but is available here in
its pre-published format), this short post will discuss the issues raised in
the article, and will conclude by assessing the dangers that are becoming
increasingly apparent in this specific sector.

The article begins by contextualising the issue at hand –
namely, the elements of the securitisation process that sees the rating
agencies play a fundamental part. To begin with, the major difference between
the securitisation process that we saw with the Residential Mortgage-Backed
Securities (RMBS) that was central to the Financial Crisis and the current ‘bubble’
forming within the field of motor finance – the size – is put forward as
something that must be considered when analysing this current bubble. Apart
from the size of the market for these securities in terms of dollar value (a
house is obviously more expensive than a car), the ‘maturity’ of motor finance
deals are equally as obviously shorter, meaning that the refinancing or transference
of debt options are much more extensive than was available during the rise of
the RMBS bubble. The article also makes clear the point that the process of
securitisation, in itself, is not necessarily a negative construct – it is the
abuse of the process that threatens society continually. However, it is
important to understand the role credit rating agencies play in the
securitisation process, simply so we know what they are supposed to do which
synergistically informs us of any transgressions.

Simply put, the securitisation process funnels the payments
of many finance deals (cars, homes, commercial rent etc.) and pools them. Then,
that pool is divided into tranches
(French for ‘slices’) and the rating agencies assign a rating to each tranche –
the most investable tranche, i.e. the one that the agencies are most confident
will see the investment returned (albeit at a lower rate) is called the senior
tranche, whilst the least investable trance (which offers the highest returns
but also the highest risk of default) is called the equity tranche. This is a
very simplistic understanding of the process (a better understanding can be
gained from this
resource), but it suffices for our usage because those who invest in these
two extremes signify for us the role of the agencies. A number of large
financial institutions, like pension funds for example, are constrained either
by regulations or their own internal control mechanisms, to only invest in
tranches rated ‘AAA’ by the rating agencies, and the agencies only rate senior
tranches at this level. Conversely, financial institutions like Hedge-Funds,
who seek the highest of returns for the clients, are free to invest in what
they like, and the highest returns can be found in the equity tranches. This
is, essentially, the role of the agencies – to signal the strength of any given
pool, via its tranches, to the marketplace. However, without going into the
details of the Financial Crisis, we know the agencies have a poor record in
fulfilling this role to any meaningful standard. This is why the suggested
issues within the motor finance securitisation process are causing alarm.

It is being suggested that because the leading car
manufacturers outsource the investigative stage of underwriting proceedings,
the fact these institutions responsible for doing so then own no equity shares
in the origination process makes it that much more likely that they will focus
on volume
rather than quality control. This, when combined with the relative
explosion in this sector as we have discussed before,
hints at the presence of the necessary ingredients for the bursting of a
financial bubble. When we factor in the historical enthusiasm of the rating
agencies to assign ratings to securities that they know are inaccurate but for
which they have been paid handsomely for, the list of ingredients missing for
the swelling and subsequent bursting of a bubble grows ever larger. The article
concludes by discussing the effect that the current environment may have upon
this ever-growing bubble, ultimately declaring that there is a distinct
possibility (or even perhaps inevitability) that the isolationist agenda being
advanced on both sides of the Atlantic will feed this bubble by relaxing the
vigilance needed to stop entities like the rating agencies from transgressing
like they have proven they will do if
given the slightest opportunity.

What is important to state is that all is not lost. It may
appear to be utopian in nature, but this short-sighted, unduly
economically-driven society does not have to be our reality. Rather than
getting clouded by the parameters that are advanced by political parties on
both ‘sides’, there is the potential to limit the actions of financial actors
so that we, as a society, are fundamentally protected from the iniquities of
the sector. That potential can only be realised if we reject the polarising
rhetoric that is advanced by most (if not all) media outlets, if we take
democratic action based upon this ideal, and commit, in everything that we do,
in advancing a sustainable economic
mentality that will, due to the dynamics of modern society, filter into almost
every area of society. Yes, it is idealistic, but to accept that we must lurch
from crisis to crisis, downplay the dramatic and heart-rending effects that
predatory finance has upon everyday life, and entertain ourselves with distractions
that only serve to continue the torment that predatory economic mentality
inflicts upon almost all of us, is quite simply unacceptable.

Wednesday, 24 May 2017

Today’s post previews the third article this week, one which
analyses the recently proposed ‘Financial CHOICE Act’ in the U.S., particularly
by way of assessing its proposed regulation for the credit rating industry. The
article, entitled ‘The Financial CHOICE Bill and the Regulation of Credit
Rating Agencies: Opening the Gates for the Gatekeeper’, is to be published in Financial Regulation
International and is available here in its pre-published
form. For this post, the aim will be to preview the article and provide some
critical analysis of the bill, all from within the parameters of understanding
that the Bill represents, quite clearly, the ethos of what this author calls ‘regulatory
amnesia’.

The ‘Financial
CHOICE Act’, with ‘CHOICE’ being an acronym of ‘Create Hope and Opportunity
for Investors, Consumers, and Entrepreneurs’, is a remarkable proposal that is
currently at the Bill stage in the development of American legislation, with it
recently moving past the House Financial Services Committee stage (after
amendments) with a vote of 34-26
to the full House of Representatives (potentially around August). The Bill,
which seeks to repeal a number of elements from the Dodd-Frank Act of 2010, is
the brainchild of a small number of Republican Representatives, led by Jeb
Hansarling. The proposed Act seeks to do a number of things, with a few gaining
the majority of the headlines. Firstly, it
proposes to repeal the ‘Orderly Liquidation Authority’, which allows the
Government to step in and provide liquidity (via so-called ‘quantitative easing’),
in order to eliminate, supposedly, ‘too big to fail’. It then goes on to
proclaim that bank testing procedures should be altered, so that systemically
important banking institutions need only be tested every two years, as opposed
to every year now. It proposes that the cap on the amount that banks can charge
retailers for processing credit and debit card fees should be lifted –
something which is being vociferously
opposed even at this early stage – whilst it also aims to, rather
incredibly, weaken the Consumer
Financial Protection Bureau which would see its role reduced and also its
independent status substantially
altered. We will come back to some of these issues shortly, because the Act
does
have support from a number of different sectors; yet, for us, we shall
concentrate on the proposed regulation of the credit rating agencies.

The article discusses the proposed regulation of the
agencies in the Act, and concentrates upon four specific sections which stand
out in this regard. The article discusses these in more detail, of course, but
section 852 seeks to remove the mandatory requirement for agencies to state how
they will release information regarding their methodologies – the obvious lack
of stated oversight essentially removes this requirement. Section 853 removes
the requirement that the agency’s CEO attest to the integrity of the internal
controls within their agency, whilst simultaneously removing the requirement to
disclose whether the rating was, or could have been affecting by any ‘business
activities’. Section 856 removes the firewalls between the marketing and rating
divisions of an agency – which, to pause for a moment, is a quite frankly ludicrous
proposal – and section 857 removes a number of Dodd-Frank elements in one foul
swoop, including the need to prove ‘state of mind’ – something which recently
resulted in S&P and Moody’s being unable to manoeuvre away from their guilt
-, the requirement to look at alternative models – thus cementing issuer-pays –
and finally the Act brings back the exemption of ‘expert liability’ to protect
the agencies from litigation. This author, in almost every piece written,
argues that we must focus on the agencies as they actually operate, and not how we would like them to, and in that
sense it is not a difficult endeavour whatsoever. The U.S. Senate, in an
extensive investigation, published a 600+
page document shortly after the Financial Crisis in which the agencies were
found to be fundamentally central to
the Crisis. The two recent fines levied by the U.S. Department of Justice
against the Big Two, totalling over $2 billion (as discussed earlier here
in Financial Regulation Matters),
detail the agencies’ failings and suggest, overwhelmingly, that the agencies consciously
act against everyone for profit and protection. This proof is not something to discard, or downplay – it is evidence of
criminality. With that in mind, the proposals included in the Financial CHOICE
Act are not only reckless, but actively threaten the American (and, by default,
the Global) society.

There are a number of calls within the media, and some
official bodies, that support the Act. The Congressional Budget Office recently
suggested that the Act, if enacted, would reduce
the federal deficit by $24 billion over a 10-year period. Others have
suggested that ‘the
reality, however, is that the current financial regulatory system isn’t working’.
Both of these viewpoints miss the point entirely, and it is vital that we
detach ourselves from the poisonous and short-sighted allegiance to political ‘wings’
in order to survey the situation accurately. If the system isn’t working, it is not because of inefficient
regulation, but because just ten very short years ago the financial elite conspired
to pilfer the resources of society on a systemic scale. The Act may reduce the federal deficit by $24
billion, a deficit that currently stands at over $500
billion, but at what cost – at placing a bet with the safety of American
citizens on the decency of the financial sector? This proposed Act is truly the
epitome of short-sightedness, and if it were to be enacted would become to
historical posterchild of the concept of ‘regulatory amnesia’. Ultimately, it
is vital that political party ideologies are removed when something so
important is at stake – the response to the proposed Act suggests that the
reality is exactly the opposite.

Monday, 22 May 2017

Today’s post previews a forthcoming article by this author,
to be published in the International
Business Law Journal, entitled ‘Credit Rating Agencies and Environmental,
Social and Governance Considerations: A Long Road Ahead’ (the pre-published
version can be found here). In
this post, the topics that the article focuses upon, as well as its
conclusions, will be reviewed against a discussion regarding a particular
movement that is currently gaining prominence within the world of big business.

Briefly, the article is concerned with analysing the recent
move by the leading credit rating agencies, in which they have pledged their
support and apparent adherence to following the ‘Principles for Responsible Investment’ (PRI)
initiative. Before assessing why the agencies have chosen on this particular
course of action, the article introduces the PRI and its aims, with the
intention of assessing whether the rating agencies, as we know them, seem to
fit within similar ideals. The PRI is a ‘movement’, for want of a better
description, that serves to mobilise investors and institutions to push for the
recognition and implementation of responsible investment practices – it is also
worth noting that it is financially supported by the United Nations, although
the PRI is at pains to make clear that it is not part of the UN. Its ideology
is based upon the need to implement environmental, social, and governance
factors (ESG) into the investment process, which it aims to do so by adhering
to the ‘six principles’ for
responsible investment, which include: incorporating ESG issues into investment
analysis and decision-making; actively incorporate ESG issues into ownership
policies; appropriate disclosure of ESG-based considerations; promote
acceptance of the PRI principles within the investment industry; a cohesive approach
to implementing the principles, and finally; consistent reporting on activities
relating to the principles. Exemplifying the technical differences between
sustainable and environmentally-concerned business practices (although the PRI
does tend to merge them together – they are not
the same thing), the PRI states that they believe that an ‘economically
efficient, sustainable global financial system is a necessity for long-term
value creation’. So, with that in mind, those of you who know anything about
the credit rating industry at all will be asking ‘how do the rating agencies
fit into that mode of thought?’

After consultation by the PRI in 2015 with its members and
interested observers, it found that that 78%
of those surveyed wanted to see ESG concerns incorporated more explicitly into
the ratings of the agencies. The article discusses how, prior to this concerted
effort by the PRI, the business practices of the rating agencies were heavily
criticised by the PRI for simply not doing enough, with interested onlookers
scoring the agencies 2/10 for their efforts to incorporate ESG into their
thinking when formulating ratings. The agencies responded by saying that
they will adhere to the ideology, although the technical elements ‘may
be defined differently’ and may not, necessarily, be labelled as typical
ESG considerations. Yet, the article surmises that the noises coming from the
agencies is the same as usual, and that when viewed in relation to the recent
history of the agencies, the real reason for the apparent adherence to the PRI
becomes clear.

Simply put, the leading rating agencies – S&P and Moody’s
especially – have recently suffered an overt blow to their reputation. The
recent fines of $1.35 billion and $730 million to S&P and Moody’s
respectively has been covered
in Financial Regulation Matters
already on the back of two articles by this author, so there is little need to
go over the actions of the Department of Justice again, but what is important
for us is that the agencies – for the first time since receiving the coveted
NRSRO status in the mid-1970s, have felt it necessary to respond to bad
publicity (usually it does not matter). Whilst this author has no reason to
believe that the agencies are worried about their position, because the
agencies are well aware of the strength of their position, it is fascinating to
see the agencies scramble to repair their reputation. Or is it? Again, as this
author repeatedly calls for, it is vital we look at the agencies as they actually are, and not how they
may appear to be, or even how we want them to be. This author has an article
under consideration at a journal that looks at the real reason for this move
into ESG and sustainable finance by the agencies, and the conclusion is that it
is not to assist in the increase in responsible investment (a post will follow
the acceptance of that article here in Financial
Regulation Matters). No, then, the agencies are not adhering to the
principles of responsible investment but are paying lip-service to the
extremely important ideal; the article concludes by stating that the
partnership between the agencies and the PRI demonstrates two important
aspects: firstly, it shows the continuation of the unwavering support by the
state and its connected organisations with regards to having faith in the
agencies to act in the interests of anyone but themselves; secondly, the
partnership heralds the beginning of a concerted ‘charm-offensive’ by the
agencies, which is an attempt to heal some of the reputational damage caused by
recent settlements and admissions. These elements are important to remember –
because there may be a more sinister reason for the agencies’ movements (more
to come on that front in the next article) – but most importantly it is vital
that, for whatever reason, we do not succumb to the relatively easy conclusion
that the agencies have learned their lesson – they have not, and nothing they say should change that; only the
cessation of the institutionalised and transgressive business practices can
change that.

Sunday, 21 May 2017

Today’s extended post will be the first of a number of
article previews this week concerning the credit rating industry. Throughout
the week we will look at a number of issues, ranging from current regulatory
proposals in the U.S. concerning the industry, to the role of the agencies in
the emerging motor-finance bubble. In today’s post, the focus will be upon a
work in progress that aims to chart the history of the ratings industry, but
does so with a ‘cultural’ lens; the thesis of the piece is that the current
agencies act in a manner which they have always
acted – ruthlessly in their own self-interest – and that we must have that at
the forefront of our minds if we are to regulate the industry for the protection of the public.

The article, which can be found here in
its current form, primarily seeks to recount the major instances within the
industry’s history and analyse them to see if a pattern emerges. Before the
article analyses the first ‘phase’ of the industry as we know it today, the
scene is set by discussing the origins of the industry before it became a
commercialised force. In the burgeoning and antebellum United States, the
problems facing the largest financiers and merchants were focused upon how to
increase the likelihood of a debtor repaying the credit that was afforded to
them (a thorough analysis of this time can be found in Olegario’s book here).
Whilst this problem was limited when most trade was localised, the introduction
of the expansive railroad network introduced the aspect of nationalised trade
where reputation could not be relied upon. The article, to emphasise this
point, focuses upon one of the largest financiers of the time – Baring Brothers – and their
ingenious resolution to the intermediation problem. In acquiring the services
of a retired and respected merchant from Boston, Thomas Wren Ward, the firm
began compiling the creditworthiness of traders and merchants by way of Ward’s
extensive knowledge and diligence in the area (Ward would create a system that ‘ranked’
merchants). In the article, an important point is raised – because the Baring
Brothers’ capital was at risk, the firm used the system to protect themselves,
and acting in a diligent and considered manner; they were not speculators in
the manner with which we know speculators as today.

However, the explosion of the railroad network did encourage speculation and a
commercialisation that the United States had not witnessed before. As most
merchants did not have the resources that large financiers like Baring Brothers
could call upon, a New York law firm called Griffen, Cleaveland, and Campbell
stepped into the vacuum in 1835, establishing a network of lawyers that would
rank and attest to people’s creditworthiness, which would then be compiled and
the information then sold for a fee – it was the first ‘investor-pays’ rating
entity. However, the firm collapsed because, up until that point in the U.S.,
there were no major economic shocks that would inspire the diligence that such
a system introduced. That all changed in the late 1830s with the Panic of 1837,
that led to the enactment of the National Bankruptcy Act of 1841 (more on this
period in American bankruptcy law can be found here)
– yet, many feared that the Act would encourage a ‘jubilee’ or a ‘universal
pardoning of all debt’, which initiated an intense need for creditors to select
those to whom they would lend ex ante
(translation: before the event), and into that vacuum stepped the first
commercially successful credit (reporting) agency: The Mercantile Agency.

The Mercantile Agency was set up by Lewis Tappan, an
Evangelical businessman and philanthropist, just two days after the enactment
of the Act – the fact that the Act was repealed just months later was
irrelevant; there was now an accepted understanding that one needed to have
information on a debtor before extending credit – fear of loss had become
engrained in the American economy. There is much to be discussed about the
first successful agency, but for our purposes the focus is on the actions of the agency. Although Tappan
was well known for his religiously-inspired endeavours – like his legal
representation for the rebellious slaves on board the infamous La Amistad schooner – this ‘piousness’
did not extend to his business, with Tappan hiring a notably pro-slavery man to
succeed him in business, leading one academic to deduce that Tappan was ‘seldom
sentimental’. Additionally, Tappan would go on to deceptively divide his
business so that his anti-slavery stance would be concealed when the business
expanded to the pro-slavery south, something which would seem to confirm the
importance of survival over ethical considerations. Tappan would recognise this
before his death, stating that the ‘eagerness to amass property… robs a man and
his family of rational enjoyment… [and] tempts him to doubtful and disreputable
acts’, although it was too late – this ‘at all costs’ culture had now been
cemented within the ever-growing firm. The men chosen to take the firm forward,
Benjamin Douglass and later R.G. Dun, would embark upon a campaign of
intimidation and disreputable legal and illegal acts to protect their products
from being deemed as contravening libel laws – the firm would create fake
lawyers, drag cases on so that poorer victims could not compete
(strangulation), and usually play the system (venue shopping) so that people
who were wronged by the agency could not seek recompense – the Beardsley v Tappan case represents the
best example of the agency ruthlessly destroying someone to protect themselves
(an excellent account of this can be found here).

So, the culture was developed towards the end of the 19th
Century. In picking up the mantle, new entrants to the field – Poor’s Railroad
Manual Company would merge with Standard Statistics in 1941 to create Standard
& Poor’s, John Moody would set up Moody & Co. in 1900 which would,
after a number of issues, become Moody’s in 1910, and finally the two oldest
firms, R.G. Dun and Co. (the Mercantile Agency rebranded) and Bradstreet
Ratings Co. would merge to form Dun and Bradstreet, that still exists today as
a credit reporting firm – would attempt
to develop the rating industry throughout the 20th Century, although
they had little success. Rating agencies were required during this time, but an
amnesia that we are more than familiar with today gripped society before the
Wall St. Crash of 1929 (and subsequently The Great Depression of the 1930s),
with the Second World War initiating an economically so-called’ Quiet Period
thereafter; as a result, rating agencies were facing extinction as late as the
1960s. However, a strange set of events would dramatically alter their collective
fortunes and the agencies’ culture would see them cemented within the economy
from then on – the real threat to their survival would encourage the absolute
commitment to the ‘by any means necessary’ culture.

In 1970, the conglomerate Penn Central spectacularly collapsed,
setting the then-record for the largest bankruptcy at $82 million. Whilst some
researchers have suggested that the investing public simply invested in large
conglomerates like Penn Central through reputation alone – this apparently
being the reason for the agencies’ lack of success – the actual reason was that
Dun & Bradstreet has been providing top-notch recommendations (akin to the
AAA rating we know today) via its ‘National Credit Office’ (NCO), which meant
that investors saw no need to consult S&P and Moody’s as they relied upon
the NCO for their information. The collapse led to a panic amongst the
investing public, with the resulting fear being who they could turn to
regarding solving the disintermediation (information asymmetry) problem that is
inherent within the capital markets – i.e. understanding the creditworthiness
of people and institutions without revealing sensitive data to the marketplace.
Rather strangely – but this author argues emblematic of the issues regarding
the perception of this industry – the investors turned to the rating agencies
to provide the information. This is strange because, quite simply, Dun &
Bradstreet, S&P, and Moody’s are, in essence, one and the same. The rating
agencies (S&P and Moody’s) were delighted at this potential reprieve
because, as their existence was being actively threatened by the public
introduction of photocopying machines through a concept known as ‘free-riding, this
would have seen their ‘investor-pays’ business model destroyed as one investor
could have easily disseminated the information to other investors with the
agency being compensated fully for their output. Yet, in a clear demonstration
of their culture prevailing, as investors turned en masse towards the agencies
for independent and accurate ratings, the two leading
agencies altered their business models so that now the issuers of debt were
forced to pay for ratings – issuers were inclined to do so to demonstrate to
investors that their creditworthiness could be relied upon, unlike that of Penn
Central and the like. Hopefully not unsurprisingly to anyone who has an
interest in the industry, researchers have found that the two agencies’ ratings
rose substantially if an issuer was paying for the privilege, which clearly
indicates the understanding that agencies act in their own interest, not that
of investors. The cementation of this culture was confirmed in 1973 and later
1975, when the Securities and Exchange Commission would designate Nationally
Recognised Statistical Rating Organisation (NRSRO) status to S&P and Moody’s,
thus protecting them from competition and confirming the power of the
oligopoly.

The article goes on to discuss the fact that the agencies
remained unregulated until 2005/6
which, as we now know emphatically, was far too late to see the agencies directly facilitate the pilfering of the
economy, pilfering which we are all still continuing to be negatively affected
by. The underlying theme of the article is this existence of a culture that is overwhelmingly concerned with survival.
It is accepted that private institutions must be concerned with their survival,
but it is declared here that the rating agencies do this to an extreme level.
Whilst we cannot dictate how a private institution is run, we can alter our
perception of these institutions so that we can predict their actions. There
continues, to this day, an incredible lack of awareness as to the actualities
of the ratings industry, which is confirmed by some deregulatory tones
emanating from the U.S. at
the minute and the insistence that rating agencies act for investors. It is clear that they do not, and when we analyse
the history of the agencies and line up all of the instances together, we can
see, undoubtedly, that these agencies will consciously and actively act against investors – it is vital, for
societal development, that investors, regulators, and the public moreover
realise this.

In order to add a bit of context to this post, it will be
necessary to go back a decade or so. In the second-half of 2007, the
once-regional banking institution RBS
had announced an operating profit of just over £10 billion, impressing all
manner of onlookers. It had done this by setting out on an expansive mission to
acquire as many financial institutions as it could, perhaps best exemplified
with the October
2007 £49 billion takeover of Dutch banking giant ABN-Amro. However, this
approach was built upon a mountain of debt, and ultimately, the bank was forced
to accept the truly massive £45
billion bailout given to it by the British Government in late 2008. Yet,
there are a few key points to mention before we get to the point of bailout.
Just weeks before the ABN-Amro purchase, Northern Rock, Britain’s fifth-largest
mortgage provider, had
failed, resulting in a memorable ‘run’ on the bank which was a clear indicator
of the perilous position of British institutions in relation to impending
explosion of the U.S. housing bubble – yet Goodwin continued with the ABN-Amro
purchase regardless, and was paid
£4 million for doing so. Another key point worth mentioning, particularly
with regards to the upcoming case, is that in April 2008 – before it accepted
any bailout – the bank issued
a call to its shareholders to support a record-breaking £12 billion cash call
to strengthen its capital position in the wake of the burst global bubble.
Writing at the time in 2008, one business media article notes that only a month
before, Goodwin had assured shareholders that a cash call would not be necessary,
but then quickly conceded that the ‘world
had changed’ and the bank had to protect itself against some £5.9 billion
worth of writedowns as a result of the Crisis. However, hindsight tends to cast
aspersions on people’s judgements, and hindsight is key for the forthcoming
case.

The claimants – the group of 9000 shareholders, including
institutional investors, small shareholders and former employees – allege that
rather than simply requiring extra cash to shore up its defences, RBS chiefs
were actively plugging holes that were developing because of their
short-sighted and reckless approach. One key element of the claim is that RBS
had been warned, by none other than leading advisors Goldman Sachs and
Deloitte, that ‘some
figures in the prospectus for the RBS cash call were vulnerable to misinterpretation
[and that] investors might conclude RBS’s ability to withstand losses was
stronger than it actually was’. Unfortunately, for RBS, there is plenty of
smoke emanating from this cash call, which seems to all intents and purposes to
be illustrative of a massive fire underneath. Shortly after the cash call was
met, the bank was nationalised. Once nationalised, it became clear that the
bank was simply not as strong as its leaders had claimed, with the immediate
aftermath revealing the actual worth of the acquisitions undertaken by Goodwin
to be up to £20
billion less than previously thought. The case hinges on the ability of the
claimants to prove that this misinformation was intentional, or that Goodwin
should have at least known about the state of affairs before initiating the
cash call, and the crucial document is the prospectus
offered in 2008 – it is worth noting that this is a civil case, meaning that Goodwin will not be criminally tried for his actions; the claimants
compensation claim is £520 million plus interest (thought to take the claim
up to £800 million).

For Fred Goodwin, it will be one of the first times he has
been in the public limelight since apologising and leaving his role of CEO of
RBS, together with a reduced
pension package. Some have labelled Goodwin a megalomaniac,
whilst others suggest that he ‘wanted
to do the right thing but it didn’t work out’. Yet, for the British Taxpayer,
this case is likely to have ramifications far into the future, which is why the
bank have worked
tirelessly to keep this case from the courtroom – it is vital for the bank
that the details of 2008 are kept private and, as the taxpayer still owns over
70% of the bank, perhaps it is vital for their interests too. Yet, although it
would result in a massive loss and a tremor for the economy were RBS to suffer
more attacks and losses, as previously discussed
here in Financial Regulation Matters,
perhaps it is time that institutions like RBS are not allowed to hide behind
the fear-mongering that revealing their inner-workings may cause. Perhaps, what
this country, and arguably every other country needs is for the financial elite
to recognise that their actions will be
scrutinised, regardless of the negative effects that the scrutiny may
cause. If the case does materialise over the next few weeks, it is likely that
we will see damning details of a bank ran irresponsibly, negligently, and
ultimately fraudulently, all overshadowed by the understanding that the
taxpayer had to save it is anyway. It is hoped, if the case does materialise, that
the public pays attention to the details of the case and sees the financial
elite for what they are – in reality, the country will likely be more
interested in the results and aftermath of the General Election; if only more
people could see how closely related those two elements are.

The SFO has had, in the words of a BBC article on the
Office, a ‘chequered
history’. Set up in response to a string of financial scandals in the 1970s
and 1980s, the Serious Fraud Office was established as part of the Criminal Justice
Act of 1987 and was operational a year later. Although the SFO have, over
the years, been involved in a number of high profile cases, not all were
successful and, as part of a media campaign criticising the Office, the SFO was
branded as the ‘Seriously
Flawed Office’ – particularly because of the high profile acquittals like
that seen in the case
against the Maxwell Brothers. A number of cases pursued by the SFO have hit
the headlines because of the costs involved compared to the rate of conviction,
with notable examples being the 1994 Brent Walker Trial, and
the 1992 Blue Arrow case, which cost £40 million each and resulted in
acquittals or successful appeals for all those accused. Although there have
been some successes, the appointment of David Green signalled a sea-change in
approach, with Green recognising that, rightly or wrongly, the chances of
obtaining serious white-collar convictions are extraordinarily low. In response
to this realisation, the SFO
adopted the American practice of Deferred Prosecution Agreements – better
known as ‘settlements’ - and have been
steadily punishing and retrieving monies for the national fund with which,
theoretically speaking, they could continue their approach in punishing
fraudulent companies and individuals.

So, can we say that the decision to dissolve the SFO is one
that is in the ‘national interest’? Can we say that the dissolution of the SFO
will deter fraudsters, white collar criminals, and money launderers, from
operating within the U.K.? Time will tell, of course, but this author suggests
not. It appears that Theresa May has gotten her way, finally, and will see a
department that is attempting to make some headway into an arena that no government department has made
headway before be dissolved for doing so – what sort of statement does that
make to the regulators of the present and of the future? A partner at the law
firm Eversheds, Neil Blundell, is quoted as saying ‘after 30 years in existence,
the SFO was just starting to show it had teeth in the fight against fraud’
and now its existence is being threatened. The passive will probably surmise
that the National Crime Agency may stand a better chance at battling fraud and
corruption, but there is a much bigger issue at play here. Theresa May, in
whatever official capacity she has been in, has realised that the financial
elite are being punished and has made it
her personal business to disrupt that punishment. She had placed the push
to lighten the load of white-collar criminals squarely within her manifesto,
and very little is being made of it. Any news cycle will contain the threats
posed by terrorism, immigration, people in receipt of state benefits, and now
even the ideology that pensioners need to contribute more to the system – but white-collar
crime barely gets a mention. Need one say any more?

Tuesday, 16 May 2017

Today’s short post acts as an update to the March
post in Financial Regulation Matters
that discussed the bank’s fraudulent creation of up to 2 million fake bank
accounts, for which it was fined $185 million. However, news over the past few
days has revealed that, in fact, up to 3.5 million unauthorised customer accounts
may have been opened instead. This post will therefore assess these claims and
will then go on to look at what this ever-developing scandal is doing to Wells
Fargo’s reputation – ultimately, the claim by major investor Warren Buffett,
that the scandal is not materially
damaging, may have already started to be proved wrong by developing events.

As this issue has already been discussed in Financial Regulation Matters, there is
little need to go over the scandal in any great detail again (a quick review of
the scandal can be found here
also). However, for us, the news that the 2 million figure for unauthorised
bank accounts is likely to be increased upon investigation is worthy of the
headlines that the development is generating. Lawyers acting for some of the
claimant customers have suggested that the higher estimate ‘reflects
public information, negotiations, and confirmatory discovery’, to which
Wells Fargo responded by saying that the new estimated figures were based on a ‘hypothetical
scenario’ and did not reflect ‘actual unauthorised accounts’. The lawyers, who
are seeking a settlement worth $142 million for their clients, claim that the
settlement figure ‘fairly
balances the risks’ for their clients (with regards to further litigation
which they may lose), but Wells Fargo have not raised their settlement offer to
more than the original $110 million they initially offered – however, the bank
is only focusing upon fake accounts opened since 2009, whilst the claimants are
focusing upon unauthorised accounts dating back as far as 2002. Yet, there are
more revelations which mean Wells Fargo will likely increase its settlement
offer.

Ultimately, the Bank is under siege, and rightly so. Warren
Buffett, speaking earlier this month, declared that he would not be surprised if
Wells Fargo’s systems were now
not better than any of its competitors with regards to flagging bad behaviour,
but this is nothing more than hyperbole at best – let us look at actions rather than imagined or desired
behaviour. Rather than Buffett’s ludicrous suggestion that ‘they obviously came
up with an incentive system that incentivised the wrong thing… most business do
that from time to time’ and ‘I
knew John Stumpf and I don’t think it had anything to do with making money’,
let us consider (if claimant lawyers are successful in proving) that the Bank
has illegally been creating fake accounts and attributing accounts to those
without the financial acumen to know what they are doing, for fifteen years. Let us also consider that
the Bank doesn’t actually know how many fake accounts it set up. Let us
consider that the bank established a lending policy that is directly leading to
segregation
in many communities within America in 2017.
Yes, let’s consider all those things, and not what Buffett suggests we should,
because ultimately Wells Fargo represents the very worst of big business. It
shows, on a daily business, why financial penalties are simply not a deterrent –
they pay the fines and settlements and continue unabated. John Stumpf and the
leaders of Wells Fargo are prime examples of when corporate crime should be
regarded as crime, irrespective of perpetrator;
lengthy custodial sentences are the only
deterrent, not retiring
and taking $133 million at the same time.

Monday, 15 May 2017

Today’s short post looks at an issue which was covered in
the very first few posts
here in Financial Regulation Matters,
which was the HBOS fraud scandal that saw a number of executives imprisoned for
their crimes against small-medium enterprises (SMEs).Furthermore, we have also discussed
in Financial Regulation Matters the development
of the compensation fund that Lloyds has set up to compensate the victims of
these crimes, and in this post the focus will be on recent developments with
this story.

The £100 million that has been set aside is, clearly, not
enough to compensate the victims of this crime. However, one of the victims
raises a really important point and that is the nature of Lloyds’ response to the crime. The victim, Ms Dove
(speaking to the Financial Times), comments that ‘there is
a sense in which Lloyds are trying to keep everything behind closed doors,
acting as their own judge and jury and handing down verdicts to a chosen assessor,
which then rubber stamps them’, with a lawyer who is acting for a group of
victims stating ‘this is
not a case where the bank is reviewing selling processes, but rather fraud and
criminal activity of the most appalling scale and severity’. Lloyds’
official response is that the £100 million is an estimate and not a cap and,
ultimately, victims will start receiving their compensation offers around June
of this year. However, the fact that Lloyds is in the process of returning
to full private status after paying off the bailout money provided to it by
the British Government cannot come into the equation; Lloyds must not see
itself as a purely private institution that can handle this business in a
purely private manner. The scale of this fraud is a stain on HBOS and,
subsequently, can become a stain on Lloyds if it is not handled in the correct
manner. The bank states that it wants the victims to be a part of the process
and that it wants the process to be as transparent as possible. These are
welcome sentiments, but they are just that – sentiments. What is really
required is that the victims of this fraud – victims who were not greedy
investors looking for maximum returns, but SME owners – are compensated in full – no more or less. Lloyds has
the funds to do this, and has put away £450 million to compensate these victims
and victims of the PPI scandal – this shows that Lloyds has the capacity to
alleviate the suffering of these victims, but do they have the will to do so? It is sincerely hoped
that they do, and if they do not they should be publically shamed for not doing
so – unfortunately, for victims who do not have the backing that Mr Edmonds
has, that may be all they have to go on.

Saturday, 13 May 2017

Today’s post looks at the recent news that the value of
finance deals for the purchasing of cars in the U.K. set a new monthly record
in March, concluding at an increased rate of 13% over March 2016, totalling
over £3.6 billion in March 2017 alone. We have discussed the issue of the automobile
(car) finance bubble growing before here
in Financial Regulation Matters, but
the nature of the consistent growth means it is worth assessing the situation
again because, ultimately, what looked like a relatively small ‘bubble’ is
increasingly appearing to resemble much larger bubbles that have burst before,
with catastrophic effects. Whilst the bursting of the car finance bubble may
not grind the economy to a screeching halt, it will have a detrimental effect upon a global economy that is still
recovering from the onslaught of 2007/08. So, in light of this, this post will
assess some of the important aspects that are continuing to be prevalent,
whilst also assessing the potential
for the introduction of a certain variable that could expand this bubble to a
size that few had imagined.

Whilst these technical issues may allay fears, the potential
of external forces affecting the situation do not. There are fears that an economic
downturn could cause the record numbers of people who have purchased cars via
finance deals to renege on their financial agreements (even before the 50%
threshold is reached). This is based, mostly, on the persistent suspicion that
reckless lending lays behind this boom, which is precisely the reason for the
regulators’ investigations into such practices. Whilst, technically, the
opportunity to remove oneself from the financing deal does exist, the many
variants of financing deals, when combined with the understanding that
financial education is worryingly lacking in society (as already
discussed in Financial Regulation
Matters), means that many customers do not know their rights or the acute
details of the deals they have entered into; for this reason, some have begun
to construct
an obvious link between this current bubble and the massive Payment
Protection Insurance (PPI) scandal that engulfed the financial sector a number
of years ago. Also, to relate the issue back to the one of systemic risk, some
onlookers have rightly noted that the leading financial institutions all have
connections to this area of finance, with one example put forward being Lloyds
Bank that, through its Black Horse brand, is the biggest
provider of car loans outside of the manufacturers themselves – there is a systemic risk.

However, there is a much more worrying factor with regards
to systemic risk. While there is a lot of focus on the situation in the U.K.
and the U.S.,
there realisation of the same opportunity in China is, arguably, of the most
concern. It was suggested
recently that the perception of borrowing amongst the young in China is
different from China’s older generations, which Chinese financiers are
suggesting ‘offers a great opportunity for e-commerce automotive transaction
platforms’ to develop, based on the fact that only 35%
of car transactions in China last year involved financing. The numbers that
are coming out of China currently – one company recently floated $294 million
worth of asset-backed securities on the Chinese market – will not cause much
concern now. However, with China recently
reporting having 240 million car owners last year – a record -, there is an
obvious opportunity for a rapid acceleration in finance deals and that alone should concern us all. Such an expansive
marketplace will be music to the ears of international investors, and
particular to the ears of international financing vehicles that will compete to
provide the financing to meet the massive demand – whether China allows that to
happen is another story entirely, but the capacity
to fuel the bubble certainly exists.

Ultimately, regulators must seek to root out cases of
mis-selling or unscrupulous practices before it is too late. Yes the bubble
will not grow to the size of the housing bubble that exploded and wreaked havoc
upon society in 2007/08, but that is beside the point. The proximity to the last explosion makes this bubble all the more
dangerous, because a massive tremor to this fragile economy could be just as
dramatic. The potential entrance of hundreds of millions of Chinese consumers to
the bubble means that regulators must
do whatever is necessary to uncover poor practices and, potentially, seek to
educate people as to the dangers of borrowing in this environment based upon a
shaky foundation. However, that will take a lot of time and resources and,
regrettably, it is likely that the bubble would have burst before those type of
socially positive endeavours are even considered.

Thursday, 11 May 2017

In today’s post, the focus will be on something more
existential than is usually the case here in Financial Regulation Matters. In what is, perhaps, an indulgence,
today’s post will look at the recent comments made by legendary investor Warren
Buffett regarding the failed takeover attempt of Unilever by Kraft-Heinz and
its partner 3G. Buffet spoke in relation to the criticism that is being
directed towards the practices of 3G – particularly regarding its ‘predatory’
behaviour and its penchant for cutting costs by any means necessary, as was previously
discussed in Financial Regulation
Matters – to which he responded that 3G was only following a ‘standard
capitalist’ approach. In light of this, we will take a closer look at the
story, but then expand the discussion to a call for the need to consider systemic issues, like Buffett does, rather
than have our vision clouded by micro-issues.

There is little need to review the whole process of
Kraft-Heinz’s failed takeover attempt of Unilever earlier this year, as it has
been covered extensively. Simply, Kraft-Heinz, which is owned (by way of a
majority) by Buffett’s Berkshire Hathaway and Brazilian Billionaire Jorge
Lemann’s 3G, tabled
a £115 billion approach to take-over the Anglo-Dutch company Unilever. The
deal garnered attention, primarily, because it represented what one onlooker
accurately described as a ‘collision
of two very different models of capitalism’, and it is that systemic
duality that is of interest here. Unilever is renowned for its commitment to
sustainable prosperity by way of contributing to and developing
social and environmental goals, with its CEO Paul Polman, who had trained
to be a Priest, affirming his belief that ‘a
purpose-driven business can be profitable… I don’t know where this notion that
it can’t be comes from’ – a fitting sentiment for a company that has its
origins in a Victorian-era mission to promote hygiene
across England. This is not to suggest that the company is angelic in any
way, because it has received
criticism in the past, but ideologically
the company differs greatly from those who wanted to take over the company. 3G,
as a firm, are renowned for their approach, which usually entails intensive
cost cutting, job losses, and eventually asset stripping, whereas Buffett is
globally famous for his shrewd and calculated approach to investing, which will
often see companies transformed and rearranged beyond recognition so that the
maximum amount of profit can be made – this author is reminded of Buffett’s
masterful approach to the acquisition of the century-old credit reporting firm
Dun and Bradstreet (D&B), in which it was Buffett’s intention to acquire Moody’s
credit rating agency at a discounted price. Through a process known as ‘stock
arbitrage, Buffett would ‘spin off’ Moody’s from D&B and would leave with
Moody’s in his pocket for the incredible
price of just $139 million – he has made this money back and then some,
given Moody’s’ rapid growth over the last two decades. Yet, Buffett, one of the
world’s richest people, suggests that he has a ‘defect’
in that he wants to be more focused
on ‘efficiency’ like 3G are with their businesses. In defending 3G’s practices,
Buffett suggested that the cost-cutting job-cutting approach is ‘pro-social in
terms of improving productivity’ and that 3G ‘have
been very good about severance pay and all of that, but they have followed the
standard capitalist formula, market system formula, of trying to do business
with fewer people’. For this author, this sentiment is the root of the
majority of problems in today’s world.

Reading about Paul Polman, it is hard to ignore the polarity
between these two approaches to doing business. Speaking in 2015 about the fact that Unilever
had missed market projections for their performance in six of the previous
eight quarters, Polman argued that the problem was not with Unilever, but with
market forecasters: ‘Analysts have over-optimistic expectations’ and ‘we would
be a hostage to the financial market if we ran this company judged on
expectations’. Polman’s criticism allude to a much bigger problem, and that
is something that this author is currently examining in a forthcoming book – the role of economic
empiricism. This devotion to the marketplace, via the ideological support of favoured economists, is nothing short of
a blight on our society. Economics, as a discipline, is a noble discipline that
seeks to examine the formulaic impact of the marketplace, which of course is
absolutely necessary. However, this insistence upon conducting business in the
most efficient and effective way possible is not ‘capitalism’,
it is ‘predatory’, and there is a massive difference between the two. Buffett’s
regret at not being more like his partners at 3G is demonstrable of an
underlying greed that is consistently and ideologically supported by certain
Economists who proclaim that this yearning for ‘efficiency’ and ‘effectiveness’
– those implicitly-destructive buzz words – should extend beyond the
marketplace onto all areas of society. This sentiment needs to be resisted at
every turn, and Unilever should be (and were) applauded for rejected the
advances of such an ideology.

Ultimately, this stance may be framed within certain
political parameters, but that would be missing the point. This author does not
reject capitalism, but argues, as Polman does, ‘who says’ that this promoted
version of capitalism – what is referred to here as ‘predatory capitalism – is how
we should conduct business? It is true that the Right-leaning parties advance
this version of capitalism, but it is important to remember that it is underpinned
by a movement within certain sectors of academia that need to be challenged. It
is simply not the case that taking over a company, reducing its costs, removing
its workforce, and ultimately stripping its assets, is an appropriate form of
capitalism – it is not. Unilever demonstrate, quite clearly, that if we turn
our attentions away from the white-noise that is economic empiricism, or ‘economic
imperialism’ as it was once known, and focus upon the fact that there is
more than enough money to go around whilst not actively operating against everyone
who is not one of your shareholders, then many of the devastating societal
issues that are nothing short of a blight upon society would arguably be
removed. Remove the glamour of Buffett’s riches, and you are left with a man
who represents something that is truly
antisocial.

Contributions are welcome to this blog. If you would like to contribute regarding any area of financial regulation, then please feel free to email me and submit your blog entry. The content should be concerned with financial regulation, and why it matters, but this is broadly defined. The blog is open to all who are professionally concerned with financial regulation, which may range from an Undergraduate Student interested in writing on the subject, to Professors and industry participants.